MSMEs will be allowed to prepay loans without paying foreclosure penalty: RBI
Micro and Small Enterprises (MSEs) will now be able to prepay loans without paying foreclosure penalty.
Banks and NBFCs are not permitted to levy foreclosure charges or prepayment penalties on any floating rate term loan sanctioned to individual borrowers for non-business purposes. RBI has is now proposed to broaden the scope of these guidelines to include loans to micro and small enterprises.
While some banks do not impose any foreclosure charges on MSMEs, a few banks continue to do so. In most cases, foreclosure charges are between 2 perc cent-5 per cent of the pre-payment amount excluding taxes
“In terms of extant guidelines, banks and NBFCs are not permitted to levy foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned to individual borrowers with or without co-obligant(s), for purposes other than business.”
“With a view to safeguard customers’ interest through better transparency and customer centricity by lenders, it has been decided to broaden the scope of such regulations to cover loans to Micro and Small Enterprises (MSEs) extended by the Regulated Entities of the Reserve Bank. A draft circular in this regard shall be issued for public consultation,” RBI said.
Earlier, an association of small enterprises had approached RBI seeking relief on the high foreclosure and non-compliance charges levied by banks. Many small enterprises have complained about the charges which have become a tool to extract higher interest rates. In one case, foreclosure charges of ₹14 lakh and non-compliance charges of ₹54 lakh were asked for a credit arrangement of ₹3.5 crore.